Once you drop the shrunken window on the tab of the other window, you end up with a multi-tabbed version of Windows Explorer.

Why would you waste screen space adding tabs when you can switch between windows from the task bar? Duplication of functionality really... ho hum

Yes, this was my first thought too. There may be a difference, though, if one uses many Explorer windows (or many windows of other applications). The task bar can become crowded soon (I normally use two lines of it), and Windows 7 starts to group the windows of the same application. Then, you can move the mouse pointer over the group, wait a little bit until Windows displays the members of the group, move over the desired one, and select. I believe this does very similar to the tabbed window. I think it is a matter of personal preference.

In general, one has to make decisions when moving from one version of the operating system (or Office, or any other application) to the other. We can either try to work the same way as we did in the old version, and try to configure the new software to look like the old one, or adjust our behaviour and ways of usage to the new (and changed) features and possibilities of the new version. I have tried both approaches over the time, and I cannot tell which one is better. Nowadays, I usually switch to the new style and interface quickly because I believe that the little extra time that I invest in learning the new ways pays off at the end of the day.

I disagree with the nay-sayers. I love the Win7 taskbar, but switching between instances of a program is not optimal. I tend to have the mouse near the top of the screen, so switching instance means moving the mouse to the bottom of the screen, hovering over the icon, waiting for the previews to appear then clicking on the right one and moving to the top of the screen again. Tabs change workflow to move to top of the screen and click on the desired tab. The tab you want is always visible, and it (for me) is much closer to the mouse.

It also offers functionality above what the taskbar does. I am not aware of any keyboard shortcut to switch between instances of a program (I know Win+1 etc but that doesn't do instances). WindowTabs lets you do alt+left and alt+right switch between instances, and because all the instances are visible on screen at once it's completely deterministic; you know exactly where to go. So personally, I find this to be much faster.

It also treats the grouped windows as one. All the grouped windows resize together, and move together. Again, this is functionality over what the taskbar provides.

I have wanted tabbed explorer for a while, so was impressed to see that you can have the tabs show only for programs you specify. I am finding I am relying on the tabbed functionality very quickly though, so have turned it back on for all programs. This includes IE which already has tabs, because it's nice to be able to quickly jump to other IE instances. This is something I have found cumbersome in the past.

What do the affected apps look like when this is running? How about showing us what it does?

i don't wanna waste my screen space and beside they do the same thing if you wanna use the tabs go for it,

I find I use both, there are times I will have multiple instances of Firefox open and other times I will have multiple tabs... really depends on the task at hand. If I'm just browsing and need to quickly look at another site, I may use a new tab... if I'm comparing two things, I like the quick Alt+Tab method, so I'll open a new instance.
Really just another option and more options are good IMHO...